There are a couple variations of this question, but if often comes up when we are talking to clients. We’ll run through a few ways this comes up and why adding people to deeds is probably not a good idea.

First example: A client comes in and has assets that she wants to protect from creditors, for example, her house. The house has a lot of equity and she does not want liens against the house. She asks, “Can’t I just transfer the title of my house to my son?”

There are a few problems with this idea. From an estate planning and tax standpoint (and I’m not an estate planning attorney, so consult an expert regarding your own situation), but there are potentially significant tax consequences to transferring property this way. From a creditor standpoint, it may be considered fraud if you transfer assets knowing that there are claims against you. That can be a complicated analysis, and depending on which statute is being used, can go back as far as 6 or 7 years to see if you transferred property to avoid creditors being able to collect.

Second example: Same situation as above with a house that the client is trying to protect from creditors, but now asks, “Can I SELL the house to my son for $1?”

Lots of issues here, especially with selling property for less than fair market value and selling to a family member. From a creditor standpoint, it is still a transfer and may be considered fraud if a creditor is able to show that it was done to hinder collections by creditors.

Third example: A client comes in and does not really have any assets, mostly unsecured credit card debt, and looks like a Chapter 7 bankruptcy would be the best option for a fresh start. Towards the end of the conversation, he says, “Oh, by the way, my parents added me to the deed of their house a few years ago for estate planning. The house is worth $1.5 million and they own it free and clear. That won’t be a problem, right?”

Wrong. In a Chapter 7, the trustee’s job is to find assets that are available to sell to pay your creditors. You now have an interest in a $1.5 million house that the trustee would be interested in selling, or at least making a deal to get your creditors paid through some sort of settlement with you and/or your parents. The case has gone from a simple Chapter 7 to a complicated analysis and some risk if you decide to move forward.

The best practice for all of these situations is to do proper estate planning, don’t transfer deeds to family members without getting advice on the consequences of that transfer, and don’t transfer assets to try to get away from creditors. Do proper planning before you need it, as that will be the most efficient (and least expensive!) option.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

Last week’s post talked about two recent articles that were really wrong about how bankruptcy works. Because there were so many things wrong with the first one, I didn’t even get a chance to write about the things wrong in the second one. So, I am taking the opportunity this week to go through the second article because I think bad information on the internet leads so many people to make decisions that are detrimental to their long-term financial future.

Here we go.

First of all, the title of this article is Chapter 11 vs. Chapter 7 Bankruptcy: What to Know. But, the article then discusses Chapter 11, Chapter 7, and Chapter 13. The biggest issue with the whole thing is that these chapters are used for very different situations. It’s not like you walk into an attorney’s office and you just pick a chapter to file. Your financial goals and situation generally determine which route you need to go down.

Let’s get to down to the dirty details:

“Chapter 11 bankruptcy is a form of bankruptcy that exists to allow businesses and corporations to follow a plan to rehabilitate or reorganize their debts so that they can remain in operation while repaying their debt.” Partly true. Business and corporations are eligible to file for Chapter 11, but you don’t have to be a business or corporation to file for Chapter 11. Individuals can file Chapter 11.

“Shouldn’t affect your personal credit score. If you file for Chapter 11 bankruptcy as a corporation or business, it shouldn’t affect your personal credit score.” Be very careful with this – a lot of banks and lenders require the business owner to personally guarantee credit cards, loans, lines of credits, and leases, so filing bankruptcy for a corporation can actually affect your personal credit score.

“Stays on credit report for 10 years: This can be especially discouraging if you file as an individual since your score may be hit pretty hard.” Oh, for the love of Pete. Yes, bankruptcy stays on your credit report as a public record for 10 years. It does not affect your credit score for 10 years and many people with low credit scores actually experience their credit score going up immediately upon filing bankruptcy. With proper rebuilding strategies, you can have a 700 credit score a year after bankruptcy.

“People who file for Chapter 7 bankruptcy typically earn lower incomes and can’t repay their debts. To qualify for Chapter 7 bankruptcy, you must be earning less than your state’s median income for a family or household of your size.” This is just wrong. One way to qualify for Chapter 7 is to be below the median income for your household size. However, I can’t remember the last time I had a client who was below median income. You can still qualify for Chapter 7, but it’s important to have a professional run the Means Test to determine eligibility. Also, there are certain categories of debts that make the Means Test not even apply. For example, if 51% of your debts are non-consumer debts (taxes, business loans, etc.), the Means Test doesn’t even apply to your situation.

“Income status requirements: Chapter 7 bankruptcy is limited to those with low income and minimal assets.” See #4? There are often ways to qualify for Chapter 7 without being low income. And, assets have nothing to do with your eligibility requirements for Chapter 7.

“Stays on credit report for up to 10 years: Because of this, filing for Chapter 7 bankruptcy may make it difficult for you to get credit or insurance, and may even make it challenging to be hired for a new job or get approved to rent a new apartment.” Talk to a professional in your state. In California, your credit score isn’t used in insurance unless it’s to make your premium lower (credit score can only be used to decrease, not increase or deny, insurance premiums). Also, in California, credit scores and bankruptcy can only be used in very specific situations for hiring. I have lots and lots of clients who get new apartments or houses during and after bankruptcy. It sometimes takes a bit more searching and explanation, but any smart landlord prefers someone who filed bankruptcy than someone with 20 collection accounts on their credit report.

“Chapter 13…In many cases, you’ll pay off most of your debt with monthly payments over the course of three to five years, after which time the rest of your debt is discharged.” This is one of the biggest myths about Chapter 13 – you don’t pay off most of your debt necessarily. You do make payments for three to five years, but often we are paying back mortgage arrears, taxes, and child support for the three to five years while the credit cards and collection accounts get very little and are discharged at the end.

“Most individuals or business qualify for Chapter 13.” Businesses that are corporations do not qualify for Chapter 13. There are two requirements for Chapter 13. You have to be an individual and you have to have regular income. You can be a sole proprietor of a business and be in Chapter 13, but if you are the owner of a corporation, the corporation cannot file Chapter 13. Quite often, the business owner took on a bunch of personal debt for the corporation and we file a Chapter 13 to reorganize those debts, but the bankruptcy is filed for the individual.

“If you’ve been discharged from Chapter 13 or another type of bankruptcy within the last two to four years, you may not qualify to file.” Oh, where do I start. The waiting times between bankruptcies are from filing date to filing date. Your discharge date has nothing to do with the waiting times. The longest wait is 8 years and the shortest is 2 years. Please have a professional tell you what your eligibility is based on your individual situation.

Overall, please know your rights and options. Please have a professional look at your situation and please do not assume that something you read on the internet was correct, especially because a lot of these issues depend on the state you live in.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

Two new articles this week, one on The Street called What is Chapter 13 Bankruptcy and Is It Worth It? and the other on Lending Tree titled, Chapter 11 vs. Chapter 7 Bankruptcy: What to Know. I reluctantly read both, hoping they would get it right…and lots of eye-rolling took place instead.

Here’s where the first one went wrong – I don’t even have enough room in this blog to outline where the second one went wrong (but I will try to for next week):

“Chapter 13 bankruptcy is one of the types geared toward individuals and families as opposed to businesses.” Wrong. Only individuals qualify for Chapter 13. If you are a sole proprietor, you are an individual. I file many, many bankruptcies for business owners because they are sole proprietors. Chapter 13 is very powerful for business owners.

“The Chapter 13 method of restructuring debts and creating monthly payments over a set period of time is similar to Chapter 11 bankruptcy, with the crucial difference being that Chapter 11 is for businesses.” Wrong. Individuals can file both Chapter 13 and Chapter 11. There are different reasons and situations where these options can be appropriate.

“The most important difference between the two is that Chapter 7 bankruptcy allows for the possibility of liquidating assets to help pay off debts. Chapter 13 does not liquidate assets.” Wrong. Chapter 7 bankruptcy REQUIRES the liquidation of non-exempt assets. That’s the trustee’s job in a Chapter 7. Chapter 13 can liquidate assets, if you choose to. The most important difference between the two is who has the ability to liquidate the assets and the purpose for filing .

“Once you’ve taken credit counseling classes you can submit a petition to file for bankruptcy. If that petition is successful, your case is given to a trustee who will oversee a case.” Ok, you don’t “submit a petition to file for bankruptcy.” You file your bankruptcy petition and an online credit counseling course is required before you actually file the petition. There is nothing in the bankruptcy code about your petition being successful and then being “given to a trustee” who will oversee a case. In both Chapter 7 and Chapter 13, you file a petition and a trustee is assigned from the very beginning. Success has nothing to do with it.

“They will also set up a meeting in which you will have to testify under oath about your debt.” There is a meeting of creditors where the trustee asks you questions about your petition, including whether you listed all of your assets and all of your liabilities. There is NOT a meeting where you get interrogated about the types of debts you have and why you had to file bankruptcy. This is one of the biggest fears and misconceptions out there.

“Throughout the duration of your plan, you are also not allowed to incur any further debts.” Wrong. In fact, I have several clients who bought new houses with mortgages while in a Chapter 13. You are required to get court or trustee approval for taking on new debt, but it’s totally possible to buy a new car (or reliable used car) or a house while in Chapter 13.

“One particularly prominent detriment to Chapter 13 (any bankruptcy, really) is that it demolishes your credit score for a while, even if you make all your payments on time.” Ok, this is the most ridiculous point in the whole article. Most of my clients that actually start rebuilding their credit during their payment plan have 650 (or higher – one came in recently with a 756) credit scores. If you make all of your payments on time for 12 months in a Chapter 13, you qualify for an FHA mortgage. By the time someone gets to bankruptcy, your credit score often goes UP when you file bankruptcy because finances have been stressed for quite some time before you get to that point.

“Chapter 13 may not be the most last resort bankruptcy option, but it’s close.” Chapter 13 is one of the most powerful debt tools available. I’ve saved houses, marriages, families, and businesses over the past 10 years using this powerful tool. I’m sitting in a meeting right now with a client who says that Chapter 13 was the best thing she ever did for her family and business.

Please find out your rights and options before making a decision. Relying on Google searches may lead you down a path where you are making decisions on bad information.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

This past week, I had a number of different people ask me questions about Chapter 7 and Chapter 13 that revealed just how misunderstood these two options are. Here are a few of those misunderstandings:

A senior who owns a house with no mortgage can file Chapter 7 and get rid of credit card debt.

This came about in a conversation where we were discussing seniors and financial stress. We are seeing an increasing number of seniors who have overwhelming debt and do not have the monthly income to support the debt payments. However, if there is a house with equity, a Chapter 7 becomes much more complicated and less likely. In a Chapter 7, a trustee is appointed to review assets and sell any that are not exempt.

In California, a senior can exempt up to a maximum of $175,000 (and this varies some, depending on age and circumstances, but this is the maximum). If there is more than $175,000 in equity, the first thing a Chapter 7 trustee is going to do is list the house for sale. While Chapter 7 may not be the best option in this particular situation, there are often other options such as downsizing, reverse mortgage, settlement, or possibly Chapter 13.

Chapter 13 requires all debts to be repaid.

The next misunderstanding of the week happened when I was talking with a client about options for reorganizing a lot of debt that included business debt, unsecured debt like credit cards, car loans, a mortgage in the early stages of foreclosure, and a decent amount of tax debt. When I brought up Chapter 13 to deal with all of these things at once, she was confused because she thought it meant that she had to pay back all debts over five years and there was no way the business could support that kind of monthly payment.

On the contrary, Chapter 13 is very powerful because it allows you to pay back debts secured by items you want to keep (like a house, car, etc.), along with priority debt, like income taxes over five years. However, the unsecured debt often does not have to be repaid in full and sometimes none of the unsecured debt has to be repaid and it is discharged at the end of the five years.

You can’t have any assets and file for Chapter 7 (or you’ll lose everything).

This is a variation of the misunderstanding above about the house and Chapter 7. Yes, you can have assets and file for Chapter 7, but it’s important to correctly value and exempt your assets. In California, there are two different ways to exempt assets, depending on if you own a home or not. Most people who file for Chapter 7 keep all of their assets and nothing is sold. That is why it is very important to make sure you know what your rights are and how to protect the assets you do have.

All of these misunderstandings go to show that people really need to find out what their rights and options are before making life-changing decisions. Also, it’s very important to understand the different options and what your future looks like after each one.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

Nothing makes me more frustrated than finding out someone read something on the internet that was wrong and then it influenced that person’s decision.

Last week, I had a colleague reach out to me regarding a company that his client hired to help him with some debt issues. The client thought he had done debt consolidation, but the company’s information on their website says that they only do debt settlement or debt negotiation. So, the first issue was the client likely did not fully understand what he had signed up for in the first place.

Then, I started looking at the company’s website. It gave wrong information about the benefits of their program and also very wrong information about the difference between debt settlement and bankruptcy. Here is the paragraph from their site that I am going to pick apart:

“Bankruptcy is an option that is generally treated as a last resort and if you need to protect appreciating assets. It will remain on your credit report for as long as 10 years & you can be denied employment, state licenses, insurance, as well as tenancy of an apartment. Most importantly, you can be denied virtually any type of credit with a bankruptcy on your report for several years. In addition, since the bankruptcy laws have changed recently, it is even more difficult to qualify for Chapter 7, the method of liquidating assets to eliminate your debt. You will not be allowed to discharge alimony, child support, taxes, student loans, judgments, or any loan on the bankruptcy petition. Under Chapter 13 bankruptcy, your debt payments are simply restructured meaning you will still have to pay a percentage of your debts while you suffer the consequences of bankruptcy. Debt negotiation is an alternative to bankruptcy.”

For insurance, your credit score cannot be used to raise your rate or deny you insurance in California. If you consent to using your credit score, the only thing the insurance company can do with it is lower your rate.

You can be denied credit for anything at any time, whether you have a bankruptcy or not. However, you qualify for a mortgage a year after bankruptcy and a car loan immediately after bankruptcy. You will receive credit card offers BEFORE your bankruptcy is completed. If you are in a debt settlement program, you will not get credit because all of your accounts are in collections.

The bankruptcy laws have not recently changed. The last time there was a significant change in qualifying for bankruptcy was 2005 (14 years ago…). There are also a number of ways to qualify for Chapter 7 (and sometimes Chapter 13 is a better route – see last week’s post).

The list of things they say you cannot discharge is pretty much wrong. You can discharge taxes in many circumstances, judgments, and all personal loans.

Finally, they try to scare you by saying that in Chapter 13, you still have to pay your debts back. Shocking. You have to pay more back with “debt negotiation” than with Chapter 13 in most cases. Again, see my recent post on what’s so great about Chapter 13, because people generally recover much more quickly from filing Chapter 13 than trying a multi-year debt settlement program.

Researching online can be a good thing, but make sure that you make your final decision based on knowing all of your rights and options, not just the one they are trying to sell you.

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.